Foreign Remittance and Economic Development

Presented by Hemesiri Kotagama

Mobilizing the Diaspora for National Development

Hemesiri Kotagama

Meaning of Development

Maximize social welfare/ satisfaction 1950: Material development 1960: Equitable development 1970: Qualitative development 1980: Righteous development 1990: Sustainable development 2000: Participatory development

Hemesiri Kotagama

Hemesiri Kotagama

Strategies of Development

Colonialism Nationalistic self reliance International dependence (Neo-Colonialism)

– Loans (WB, IMF, ADB … )– Grants/aid– Foreign private investments (FDI)– Foreign remittance (Diaspora based Development:DBD)

3% of the world population live outside of motherland. Sri Lankans in middle east and Malaysia (2000) was 1.5

Million to 0.8 Million – i.e. 5% to 8% of the population.

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Sri Lankans in Oman

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Magnitude of remittances: 1

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Magnitude of remittances: 2

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Remittance vs. FDI: Self Reliant Development: 1

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Remittance vs. FDI: Self Reliant Development: Facts

Remittance in Sri Lanka– exceeds FDIs by 2-3 times. It is stable and earnt by us.– 2 to 3 times of net foreign assistance.– 25% of export earnings. Second largest next to garments, ahead

of tourism, tea.– 2 times the earnings of tourism– 3 times the investment made through BOI– Same as the proceeds of privatization income 1989 to 1999)– 7% of GDP.– 10% of households receive and dependant.– 21% of household income of recipients.– 45% of the recipients are from the poorest 40% of people. – approximately Rs. 600 per month per capita.

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Who Remits: Rich or the Poor?

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Backbone of Sri Lanka’s Economy: Shame to Fame

The government of Sri Lanka has stated:

“Overseas remittance have now become the backbone of the country’s economy.“

Asian Migration News, 31 August 2001

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Development Impact of Remittance: Still Ambiguous

Development impacts depends on:– What proportion of remittance is spent on consumption

vs. investments.– What kinds of investments are made.

Empirical Study (World Bank, 2005)– World over remittances (official) reduce poverty– However in South Asia remittance (official) have NOT

had an impact on poverty reduction.– In south Asia (official + unofficial) remittance has an

impact on poverty reduction.– A 10% increase in remittance will reduce the poverty level

by 0.9%.

Hemesiri Kotagama

Development Impact of Remittance: Still Ambiguous

Hemesiri Kotagama

Policy Determinants of Effectiveness of DBD

Encouraging productive migration (unskilled to skilled, loans, insurance … )

Enhancing effectiveness of remittance channeling (financial institutions; informal (50%) to formal sources)

Mobilizing for Productive investments (consumption to investments … small enterprises, education, large infrastructure)

– Very little effort taken (Athukorala, n.d). Reintegrating the diaspora to national development. Social safety to the left at home.

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Enhancing Effectiveness of Remittance Channeling: Stick and Carrot

Stick approach has failed – South Korea enforced a law that 80% of

earnings should be remitted. ( Similar efforts by Philippines, Pakistan, Thailand, Bangladesh).

– In 2002 Sri Lanka announced to impose 15% tax on the US $ 1.2 billion remittance received each year. Was quickly withdrawn.

Migration News, January 2003.

Hemesiri Kotagama

Enhancing Effectiveness of Remittance Channeling: Stick and Carrot

Carrot approach continues– Tax free purchases on return. Does not encourage

investments. Siphons out foreign exchange.– Repatriable foreign currency accounts (NRFC). Ineffective

as interest rates and other fringe benefits are not competitive.

– Foreign currency denominated bonds “Resurgent Indian Bonds: 1998” IR 7.75% US $ +

concessions to buy prime land. Used to fund infrastructure projects.

Sri Lanka Nation Building Bonds: 2006, IR 4.45% US$ + concessions to buy a car. Used to fund infrastructure projects (airport, highways).

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Mobilizing Remittance to Productive Investments: International Experience

Bulk of remittances spent on consumption and household commodities.

Pakistan on buying land. Upgrading housing. Has a multiplier effect of 3 (Mexico). Substantial amounts are spent on education of children. Each migrant worker creates 3 local jobs (Bangladesh). Eases local unemployment. Investments on Public infrastructure ?

– Sri Lankan Nation Building Bond is a hope for the future.

Hemesiri Kotagama

Summary

A nexus is developing between national development and foreign remittance.

A paradigm shift: Shame to Fame on foreign employment. Impact of remittance on development depends on effective

mobilization and judicious investment. Sri Lankan Nation Building Bonds being directed to

mobilizing foreign remittance towards infrastructure investment is indeed an judicious development strategy.

We wish it success in developing our nation, materially, equitably, qualitatively, righteously, in a sustainable and participatory manner.

Hemesiri Kotagama

Acknowledgement of sources of information

Central Bank of Sri Lanka, Website. www.cenwor.lk International Organization for Migration (2003)

Migration and Development: A Perspective from Asia.

World Bank (2005) Sri Lanka’s Migrant Labor Remittances: Enhancing the Quality and Outreach of Rural Remittance Infrastructure.

World Bank (2005) Migrant Labor Remittances in the South Asia Region.

Hemesiri Kotagama

Thank you very much …

His Excellency the Sri Lankan Ambassador for inviting me to speak on this nationally important issue.

The audience for sharing knowledge.

Hemesiri Kotagama

Pleasure of love is in sharingValue of knowledge is in sharing …

Hemesiri Kotagama